Improving existing buildings - what finance options are available?

The existing building challenge

Each year, only around two per cent of Australia’s buildings are considered ‘new’. The remaining 98 per cent presents one of the key challenges of the built environment; making our existing stock more resource efficient, healthy, productive and sustainable. 

To help meet this challenge, the Green Building Council of Australia (GBCA) has developed the Green Star – Performance rating tool, in collaboration with key stakeholders to assess the ongoing operational performance of existing buildings. The Green Star – Performance rating tool allows building owners and operators to measure their building’s holistic performance against industry benchmarks and set targets to improve energy and water efficiency, and improve factors that influence productivity, health and learning such as indoor environment quality.

Australia’s commercial and residential built environment accounts for 23 per cent of our greenhouse gas emissions, but it also represents the biggest opportunities for greenhouse gas emissions.  ClimateWorks’ Low Carbon Growth Plan, updated in 2011, argues that Australia can reduce its greenhouse gas emission to 25 per cent below 2000 levels by 2020 at an average annual cost of AUD$185 per household, and that this reduction can be achieved using technologies that are available today. The most cost-effective abatement opportunity, according to ClimateWorks, is retrofitting commercial buildings such as offices, shopping centres, schools and hospitals.

While a number of building owners have undertaken environmental upgrades, several significant barriers stand in the way of building owners taking this step.


Overcoming barriers

The GBCA has often called for closer collaboration between industry, government and NGOs / industry associations in order to help address key problems.

Such information asymmetries (where a lack of knowledge increases the fear of making an adverse selection), split incentives (where the costs and benefits of energy efficiency investments go to different parties), unpriced externalities (where the costs or benefits of an economic activity are born by a third party), bounded rationality (where too much information can lead to decisions being based on ‘micro’ factors rather than ‘macro’ gains), regulatory problems and the time lag which can occur between substantial investment in energy efficiency gains and the corresponding financial returns.

Access to capital and/or affordable finance options is still an issue for many building owners. Without access to grants, tax relief or alternative financing options, many building owners will find it too difficult to invest in upgrades to their buildings and the potential of the built environment to make significant contributions to Australia’s emissions reduction efforts will go unrealised.

However, one of the biggest barriers facing building owners remains the issue of split incentives. Recognising that overcoming this barrier will unlock opportunities that will benefit building owners, tenants and the environment, several state and local governments are enabling building owners to access Environmental Upgrade Agreements as a way to overcome finance obstacles and split incentives.


What is an Environmental Upgrade Agreement?

An EUA is a tripartite agreement between a building owner, a local council and a finance provider.

Such information asymmetries (where a lack of knowledge increases the fear of making an adverse selection), split incentives (where the costs and benefits of energy efficiency investments go to different parties), unpriced externalities (where the costs or benefits of an economic activity are born by a third party), bounded rationality (where too much information can lead to decisions being based on ‘micro’ factors rather than ‘macro’ gains), regulatory problems and the time lag which can occur between substantial investment in energy efficiency gains and the corresponding financial returns.

Access to capital and/or affordable finance options is still an issue for many building owners. Without access to grants, tax relief or alternative financing options, many building owners will find it too difficult to invest in upgrades to their buildings and the potential of the built environment to make significant contributions to Australia’s emissions reduction efforts will go unrealised.

However, one of the biggest barriers facing building owners remains the issue of split incentives. Recognising that overcoming this barrier will unlock opportunities that will benefit building owners, tenants and the environment, several state and local governments are enabling building owners to access Environmental Upgrade Agreements as a way to overcome finance obstacles and split incentives.


Who is offering EUAs?

A number of states, cities and organisations are offering financial solutions.

Victoria

change in Victorian legislation now allows all Victorian councils to offer EUAs (which could previously only be offered by the City of Melbourne through the City of Melbourne Act 2001). The amendments came into effect in November 2015. They give all Victorian councils the power to offer EUAs, but do not require them to do so. 

New South Wales

The NSW Government passed legislation in 2011 allowing local governments in NSW to enter into EUAs with owners of eligible buildings and finance providers as a way of funding upgrades to existing buildings. 
The City of SydneyParramatta City Council and North Sydney Council all now offer EUAs for building owners within their local government areas and several more councils in NSW, including Lake Macquarie Council are planning to offer EUAs. 

South Australia

On 30th April 2012, the Premier's Climate Change Council endorsed advice to the Minister for Sustainability, Environment and Conservation entitled Environmental Upgrade Finance for Greening South Australia’s Building Stock.  This advice makes a series of recommendations relating to the establishment of Environmental Upgrade Finance in South Australia. Public consultation has now closed. 

Low Carbon Australia Limited

Low Carbon Australia Limited (LCAL) was set up by the Australian Government in 2010 as a company limited by guarantee, with an independent board of directors. LCAL provides finance solutions and advice to Australian business to encourage action on energy efficiency and cost effective carbon reductions. 
LCAL’s role in EUAs

LCAL acts as a financier providing capital to help develop EUA projects. LCAL also assists other financiers, business and government to identify energy efficiency opportunities. 
LCAL has also joined with the National Australia Bank and Eureka Funds Management to establish The Australian Environmental Upgrade Agreement Fund (TAEUAF) to provide finance for EUAs.
In December 2012, the Australian Government announced that LCAL would merge with the newly established Clean Energy Finance Corporation (CEFC). The merger will create a single organisation that aims to provide new, bigger opportunities in energy efficiency financing under the banner of the CEFC. LCAL’s capital funding is on track to be fully committed before 30 June 2013, by which time it is expected LCAL’s investment function will be integrated into the CEFC.


What other options are available for assisting with environmental upgrades for buildings?

LCAL

Aside from playing a part in offering EUAs, Low Carbon Australia also has a range of other finance solutions that it can offer to businesses that are looking for ways to increase their energy efficiency.

Clean Energy Finance Corporation

As part of the Australian Government’s Clean Energy Future package, a $10 billion commercially-oriented Clean Energy Finance Corporation (CEFC) has been established to drive investments in clean energy, energy efficiency and low emissions technologies. An independent Board has been appointed with Ms Jillian Broadbent AO appointed as Chair.  A report by an Expert Review Panel delivered in March 2012 establishes the broad principles to guide the direction of the CEFC. While LCAL will be merging with CEFC, details of how businesses might be able to access funding are not yet available. The GBCA will continue to work with government and key stakeholders to advocate for useful outcomes for our members.

Community Energy Efficiency Program

The Community Energy Efficiency Program is a merit-based grant program. It is available to local councils and non-profit community organisations to undertake energy efficiency upgrades and retrofits to council and community-use buildings, facilities and lighting. 

Grant programs

In 2009, the Australian Government allocated $90 million to the Green Building Fund to assist building owners to undertake upgrades that would improve the energy efficiency of their buildings. This program has now closed and there is currently no other grant program of this nature available.


Where can I find more information on these initiatives?

Each of the websites above will lead you to further details about EUAs and their use. However, there are other organisations doing work in this area, on promotion, research and cases studies.

Some of these include: